Washington Memo; The President's Tax Cut and Its Unspoken Numbers

By DAVID E. ROSENBAUM

Published: February 25, 2003

Correction Appended

WASHINGTON, Feb. 24—
The statistics that President Bush and his allies use to promote his tax-cut plan are accurate, but many of them present only part of the picture.

For instance, in a speech in Georgia last week, the president asserted that under his proposal, 92 million Americans would receive an average tax reduction of $1,083 and that the economy would improve so much that 1.4 million new jobs would be created by the end of 2004.

No one disputes the size of the average tax reduction, and the jobs figure is based on the estimate of a prominent private economic forecasting firm.

But this is what the president did not say: Half of all income-tax payers would have their taxes cut by less than $100; 78 percent would get reductions of less than $1,000. And the firm that the White House relied on to predict the initial job growth also forecast that the plan could hurt the economy over the long run.

The average tax cut (the total amount of revenue lost divided by the total number of tax returns) is over $1,000 because a few rich taxpayers would get such large reductions. For households with incomes over $200,000, the average cut would be $12,496, and the average for those with incomes over $1 million would be $90,222.

But the cut for those with incomes of $40,000 to $50,000, according to calculations by the Brookings Institution and the Urban Institute, would typically be $380. For those with incomes of $50,000 to $75,000, it would be $553.

The president's jobs figure was based on a preliminary analysis by Macroeconomic Advisers, of St. Louis. The firm, to whose services the White House subscribes, issued projections in January concluding that by raising disposable income, bolstering stock values and reducing the cost of capital, the president's program would lead to 1.365 million new jobs by the end of next year.

But the White House has never mentioned the caution in the second paragraph of the firm's report. The forecasters predicted that if the tax cuts were not offset within a few years by reductions in government spending, interest rates would rise, private investment would be crowded out, and the economy would actually be worse than if there had been no tax changes.

The president has not proposed spending reductions that would offset the tax cuts. To the contrary, the administration has argued that the budget deficits resulting from the cuts would be too small to harm the economy.

Another argument that administration officials make regularly is that under the president's plan, the wealthy would bear a larger share of the nation's tax burden than they do now. A table released last month by the Treasury's office of tax analysis showed that people with incomes over $100,000 would see their share of all income taxes rise to 73.3 percent from the current 72.4 percent.

At the same time, the table showed, taxpayers with incomes of $30,000 to $40,000 would get a 20.1 percent reduction in income taxes, and those earning $40,000 to $50,000 would get a 14.1 percent cut.

The problem with figures like those is that a large percentage of a small amount of money may be less important to a low- or middle-income family's lifestyle than a small percentage of a large amount of money would be to a rich family. For example, a $50 tax cut would be a 50 percent reduction for a household that owed only $100 in taxes to start with, but that small amount of money would not significantly improve the family's well-being.

A better measure may be the increase in after-tax income, or take-home pay, that would result from tax cuts. According to data from the Joint Congressional Committee on Taxation, the tax reduction of $380 for a family with an income of $45,000 would amount to less than 1 percent of the household's after-tax income. But the $12,496 tax cut received by a family with an income of $525,000 would mean a 3 percent increase in money left after taxes.

The president and his advisers also offer a variety of incomplete statistics to bolster their proposal to eliminate the taxes on most stock dividends.

Among the points they make are that more than half of all taxable dividends are paid to people 65 and older, that their average saving from eliminating the tax on dividends would be $936, that 60 percent of people receiving dividends have incomes of $75,000 or less and that up to 60 percent of corporate profits are lost to income taxes paid by either the companies or the stockholders.

All that is true, but here is a more complete picture:

Only slightly more than one-quarter of Americans 65 and older receive dividends. Two-thirds of the dividends the elderly receive are paid to the 9 percent of all elderly who have incomes over $100,000.

The Tax Policy Center at the Brookings Institution and the Urban Institute calculated that the average tax cut from the dividend exclusion would be $29 for those with incomes of $30,000 to $40,000 and $51 for taxpayers with incomes of $40,000 to $50,000.

On the other hand, the two-tenths of 1 percent of tax filers with incomes over $1 million (who have 13 percent of all income) receive 21 percent of all dividends, and the Tax Policy Center figured that their average tax reduction from the dividend exclusion would be $27,701. For taxpayers with incomes of $200,000 to $500,000, the typical tax cut from the exclusion was calculated at $1,766.

In instances where both the corporation and the shareholder are paying taxes at the maximum rate, it is possible, as the administration maintains, for 60 percent of the profits to be taxed away. But calculations based on I.R.S. data and performed by Robert S. McIntyre of the nonpartisan Citizens for Tax Justice show that on average, only 19 percent of corporate profits are paid in taxes by companies and shareholders combined.

Correction: March 1, 2003, Saturday A Washington Memo article on Tuesday about the Bush administration's use of statistics to promote its tax-cut plans referred imprecisely to the source it used to project that the cuts would create 1.4 million jobs by the end of next year. While the administration did take into account a preliminary analysis by the St. Louis forecasting firm of Macroeconomic Advisers, the White House officially cited the work of its own Council of Economic Advisers.